Fresh Oil Price Rally Stokes New Hopes
Crude oil prices have maintained a northward trajectory, even up to the levels last seen in mid2015, to boost the confidence that it may have finally turned the corner. Chineme Okafor writes on rising fortunes of oil and what it could mean for Nigeria’s e
Reports from Financial Times of London that crude oil recent price rally extended to new heights of above $60 a barrel when Brent crude last Wednesday climbed to a level last seen in mid-2015, would to a large extent gladden the hearts of Nigeria’s federal authorities for many reasons. Accordingly, this could begin to stoke hopes within the oil industry that the market has finally turned the corner after about three years of downturn that has affected economies like Nigeria’s which are hugely dependent on oil.
As reported, the price recovery had been underway since June when demands for crude finally started to outstrip supply, and the global oil glut that had built up over the previous three years started to draw down.
“Oil has always been a cyclical market and at the moment traders are realising they’re still living off just two things to meet rising demand: US shale and the legacy investments in fields made prior to the price crash in 2014,” said chief commodities analyst at the Nordic corporate bank, SEB, Bjarne Schieldrop, to the Financial Times.
Schieldrop further added that,“From 2019, the pipeline of supply could dry up pretty quickly and the industry, including US shale producers, are signalling they need these higher prices.”
Changes As indicated by market analysts, much of the recent tightening of the oil market has been driven by the decision of member countries of the Organisation of Petroleum Exporting Countries (OPEC) and their allies led by the Russian Federation to, since January, cut about 1.8 million barrels of oil per day outputs, which is about two per cent of global supply from the market, and significant drawdown in shale oil production from US producers.
Together, OPEC and the Russia-led coalition have continued to support the production cut, and even shown signs they would support its extension through most of 2018 when they meet again on November 30. This has also minimised fears that the price rush could be brief because they could return to producing more oil to flood the market.
Similarly, demand for oil has reportedly continued to soar on the back of low petrol and diesel prices to the benefits of motorists. And, there is equally very good evidence in the oil futures market to show that the oil market is perhaps on a tight end.
Recent futures curve for Brent were seen to have been in a state of backwardation for some time now. Backwardation is a situation in which near-term contracts trade at a premium compared to when the contract was further away from expiration.
As explained by market experts, a state of backwardation usually followed periods of time when the oil market is tight, unlike ‘contango’ which is the opposite, and occurs during surplus times.
A contango also involves the hoarding of oil in storage to be sold at a higher price at a later date, which is what the market had seen lots of in the past three years when it buckled under supply glut.
No threat Considering the role shale oil has in determining the dynamics of the market, further market reports explained that the industry was looking out to the US shale industry for a response that could possibly halt this bullish trend, but that was yet to come from shale producers.
Being very instrumental to ending the $100/b oil era in 2014, the US shale industry had remained a big influence that traditional producers frequently considered in making forecasts for the market. However, the US Energy Information Administration (EIA) noted in a data it released in August that the US shale oil was not performing as well as everyone thought they did or could do.
The EIA in the August oil production data showed that total US oil output actually fell from 9.234mbd in July to just 9.203mbd in August. And, so, with its rising costs, falling rig count, production problems and lots of debt, experts feel the US shale industry could be on a slowdown route that is very unlikely to halt the new price rise.
Good movement Also, like a fortunate pull, the development in prices of oil, which was very dominant in Nigeria’s descent into economic recession in 2016, as well as her recent recovery from same, would come very welcomed by the country.
Entering into a very crucial period of its administration, the President Muhammadu Buhari – led government would ordinarily wish to have this price movement sustained to amongst other things allow it more money to fund its budget, which has largely suffered poor implementation from paucity of funds.
Now rising to within $60/b in November 2017, the influence, especially for Nigeria could be substantial, when it is considered that oil production from the Niger Delta has remained relatively stable and Nigeria is yet to get into the production freeze band approved for it by OPEC.
As was known, Nigeria’s economic recession was sharply activated by a steady decline in the prices of oil in the global market, and production disruptions in the Niger Delta, which brought about a huge drop in Nigeria’s oil and gas output.
Without a doubt, these twin problems of low oil price and output, forced down Nigeria’s foreign exchange earnings, reduced her revenue, stimulated a devaluation of her currency – the naira because of the scarcity of foreign exchange, as well as resulted in a general rise in the prices of goods and services, starting with that of petrol pump price.
Also, with the general rise in prices, came the steep rise in inflation figures and a subsequent drop in trade and industrial activities and the resultant rise in unemployment and depressed Gross Domestic Product (GDP) figures for about five consecutive quarters.
According to the NBS, in the second quarter of 2017, the nation’s GDP grew by 0.55 per cent year-on-year in real terms, indicating that economy emerged from recession after five consecutive quarters of contraction since Q1 2016.
Also, the country’s foreign exchange reserves could be buoyed further with stability in oil prices. The Central Bank of Nigeria (CBN), in September, indicated that the country’s foreign exchange reserves had risen to a 31-month high of $33 billion, and that was when oil prices were circa $55/b, additional price rises would subsequently add to the reserves deposit to support the country’s economic recovery efforts.